What separates winners and losers in growing the core?
What separates winners from losers when it comes to creating “organic growth”, by growing the core business rather than relying on expanding into new categories or acquiring other businesses? I came across a Market Leader article from a few years ago that suggests some answers to this question, written by Chris Ingram, based on detailed analysis of 21 companies covering different categories and regions, called the Ingram Growth Index. The article is a bit old, but the conclusions still ring true to me.
1. Scale, Leadership and Focus – The Building Blocks of Success
Consistent with our learning on growing the core, the majority of the winners in the Growth Index are leaders in their chosen markets. And as the article says, "leadership tends to be a benefit of focus – the decision to concentrate on a limited number of markets where one can sustain a leadership position."
The perils of not focusing are shown by Sarah Lee, the only company in the index to have actually declined in organic terms. This was the result of an unsuccessful diversification drive, which saw former CEO Steve McMillan claiming that "Selling L'eggs pantyhose in a department store is no different from selling Ball Park Hot Dogs from a stand." Under a new CEO the company decided to re-focus by divesting 40% via divestment of peripheral businesses
2. Patient and Persistent Focus on Core Categories
The Ingram Index shows that "high-growth companies tend to be those that focus intensively on their core markets and do a lot of 'incremental' innovation'. "
Reckitt Benckiser was one of the best performing companies in the index. They have focused on a number of household cleaning categories and delivering "problem-solving innovation" rather than "image-led branding". As former CEO Bart Becht said, 'We tend to be very good when there is a clear functional benefit behind the product. We would not be very good at selling perfume." In addition, the bulk of marketing investment is concentrated behind designated 'power brands'. The revenue share of the top 17 brands grew from 40% in 2000 to 71% in 2010.
The Growth Index confirms our belief in the power of being brilliant at the basics. "Before leaping towards risky innovation, the best companies think hard about things like consumer and trade marketing effectiveness," says Ingram. Gillette's price/deal realignment in its Duracell Batteries business is given as an example. Volume sold on promotion reduced from 49% to 44%, free battery giveaways fell by 60% and AA battery average price stabilised, resulting in a doubling net margins over a four-year period.
In conclusion, you don't need 'blue sky' thinking and exploitation of 'white space' opportunities to be successful. Focusing resources and effort on your core business, with a stream of renovation, is a proven way of delivering sustainable, profitable growth.